12 May Q&A: 50-50 Partner Buyout

Question: My partner and I started our business 31 years ago. We share ownership 50-50. He’d like to retire and wants me to buy him out. We don’t have a buy-sell agreement of any kind in place. How can we agree on price? And, if we can’t and he just quits working, would he be entitled to compensation?

Answer: Let’s tackle the easier question first – regarding compensation. Owners should completely separate compensation for labor from return to owners (equity holders). Fair compensation should be paid to persons who render service to the company. A good indication of “fair” is that which the person could obtain from another source for rendering similar services on an arms-length basis. If your partner does not work, how could any compensation be merited?

How can you agree on price? You’re in a tough spot. One method is a “take or pay” deal. You flip a coin to decide who gets to name the price. Then, once a price is named, the other gets to decide whether he wants to sell his ownership at that price or buy out his partner at that price. Another is to hire an independent appraiser to represent both of you. He could help you both understand his opinion of “fair value” and then attempt to mediate the determination of a price. Good luck. I’m sure I don’t need to tell you that these tough issues should have been tackled years ago and a buy-sell agreement put in place.

1Comment

frankm

Good article on Buy/Sell. It would have been nice to also address the fact that if one partner dies (or is disabled), it is impossible to negotiate a price or at best it becomes a fire-sale. Having a well written buy/sell agreement FUNDED by life insurance (and disability income insurance) and including in that written agreement a periodic evaluation method/formula is imperative.